Tech giant Apple has been swatted by the U.S. government
lately over e-book price-fixing, while the company has watched
its dominance in mobile phones and tablet computing erode as
more competitors enter those markets. But for exchange-traded
funds that track growth stocks, none of this matters, according
to data prepared for Institutional Investor by New
Yorkbased financial data firm Axioma. Of the 11 growth
ETFs examined by Axioma, eight had Apple as their largest
holding.

The iShares Morningstar Large Growth Index Fund (fund A in
the chart below), had the largest holding, with 10.94 percent
of its assets in the iPhone maker. The Vanguard Mega Cap 300
Growth Index Fund has the second-largest holding, with 8.65
percent. The Vanguard Growth Index Fund, the SPDR S&P 500
Growth ETF and the Schwab U.S. Large-Cap Growth ETF have 6.77
percent, 6.27 percent and 5.77 percent, respectively (see chart
1 below).

To Melissa Brown, senior director of applied research at
Axioma, the heavy concentration in Apple shares among some
growth ETFs is cause for concern. Apple is a very big
stock in the market, so maybe its not that surprising,
but it really is betting big on Apple, she says. If
youre buying that iShares Morningstar Large Growth Index
Fund, for example, thats probably something you should
know.

Growth ETFs tend to have a high percentage of their assets
in technology and consumer discretionary stocks, as chart 2
below shows. But the actual mix of shares in technology and
consumer discretionary companies is anything but uniform,
according to Axiomas analysis. Apparently, what
growth means varies very widely from ETF to ETF, says
Brown. Probably even more than with other ETF strategies,
the differences here look bigger than any other ETFs weve
looked at.

Chart 2

Not all growth ETFs, however, are making a big bet on Apple.
Three of the funds (the First Trust Large Cap Growth Alphadex
Fund, the Guggenheim S&P 500 Pure Growth ETF and the
Powershares Dynamic Largecap Growth Portfolio) have no exposure
at all to the Cupertino, Californiabased computer
maker.

Growth ETFs largely fall into one of two broad strategies,
according to Brown. Basically, youve got two
different definitions of growth, she explains.
One is more stable growth, which would be steady and
not extremely volatile. Then theres the cyclical
growth, where growth may be higher now but probably contains
more volatility.

On the more volatile end of the spectrum, Brown points to
iShares Morningstar Large Growth Fund. Although its name
wouldnt suggest any particular view on growth, the fund
is very tech heavy and very concentrated, Brown
says. Apple makes up 11 percent of its portfolio; tech is 35
percent of assets; and the fund is very concentrated, with 80
percent of the portfolio in the biggest 50 stocks.

The Guggenheim S&P 500 Pure Growth ETF falls on the
other end of the spectrum, says Brown. The fund doesnt
hold Apple shares at all, and its much more heavily
weighted in consumer discretionary stocks than technology
companies. The Guggenheim ETF has a much higher exposure to
momentum than most of the growth ETFs Axioma studied,
meaning that the stocks in its portfolio are ones that
in general have done well recently, which is not true for all
of these portfolios, adds Brown.

Indeed, the growth ETFs exposure to momentum 
that is, swings in performance by various stocks  is
another area in which there is some diversity (see chart 3
below). The common wisdom about growth managers is that
they tend to be more momentum based, [but] what were
seeing here is that this is not the case, says Brown.
Its true for some of the funds, but not true for
all of them. Some of them seem to have a reasonably high
exposure to low-momentum stocks, which is really kind of
interesting. You tend to see that more in a value-oriented
portfolio.

Already Registered?

MORE IN APPLE BIGGEST BET AMONG GROWTH ETFS

Partner Content

With global infrastructure needs projected to top $50 trillion through 2030, urban expansion is creating important new investment opportunities. In The Wealth of Cities, a special report from Prudential Investment Management, we analyze the four key investment sectors created by this prime time of urbanization.